Transurban Group (TCL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Transurban Group FY '24 Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Taryn Chua, Senior Manager, Investor Relations. Please go ahead.

Thanks, Mel. Good morning, everyone, and thank you for joining us at Transurban's 2024 Full Year Results Briefing. Transurban acknowledges the traditional owners of the lands throughout Australia, and we pay respect to elders past and present. We acknowledge our roads and infrastructure are built on country. With deep respect, we incorporate the voices of First Nations peoples in our approach, supporting equitable access to mobility across communities. We're joined today by our CEO, Michelle Jablko; and CFO, Henry Byrne. And together, they'll take you through the presentation that we lodged with the ASX this morning. Today's presentation should take about 30 minutes, and then we'll have plenty of time for questions. I'll now hand over to Michelle to get us started.

Thanks, Taryn, and good morning to everyone on the call. I'm really pleased with the way in which we've delivered this set of results today. We've delivered strong free cash generation, driving distribution growth of 7%. Revenue is up almost 7%, and traffic has grown in each market. Importantly, we've been very disciplined on costs, outperforming our guidance and improving margins. And alongside the result itself, I really feel we're seeing evidence of our strategy coming together. We've announced some new major road upgrade for the Logan Motorway in Queensland. We're engaging constructively on toll reform in New South Wales alongside the government and our investment partners. And we have a renewed customer focus that is translating to improved NPS and setting the foundations for our future growth. But if I take a step back, this has also been a year of change for our organization. We've been evolving and also making sure we keep momentum to continue delivering for our investors. If I summarize what we spoke about in May at our Investor Day, our strategy is really focused on 3 key areas: enhancing stakeholder value for our customers and our security holders, pursuing growth where we have the potential to excel and driving efficiency across our business. Customer community and government expectations continue to evolve, and our approach reflects this. We believe that if we create value for our stakeholders, we create opportunities to grow and continue to replenish our portfolio. And if we do it in a disciplined way, we'll create value for our security holders. We also believe we have a long pipeline of potential growth opportunities, and we're committed to working hard to bring them to fruition. That includes making sure we're an efficient business with a balance sheet that is ready to support growth. Striking the right balance between these 3 focus areas is what will drive growth in value and distributions for our investors. We've also organized our business and people to better deliver our strategy. We've launched a new operating structure to bring a whole of company view to the way we work. It's about having each of our stakeholders and the key parts of our business represented around the table and driving more business efficiency while we continue to deliver an excellent experience on and off the road. And today, we announced 2 new members to our executive committee as the final stage in the operating model changes. Nicole Studer has been appointed Group Executive delivery and risk and will be based in Melbourne and Sara Hack as Group Executive Corporate Affairs based in Brisbane. We look forward to Nicole and Serra joining us rent in the coming months. We've got a great team of people working throughout our business, and we're already seeing early benefits of our new model, things that just wouldn't have been possible a few months ago, like addressing third-party costs with a group-wide lens and making payments easier for customers. And I'm confident that the results will be better for both customer and investor outcomes. All of this better positions us to access the growth opportunities ahead, and we see a lot of avenues for potential growth as demonstrated here. Right now, we have the West Gate Tunnel project, the Northern Extension Project and the M7M12 project all set to open in the next year or 2. We then have new opportunities outside of these in negotiation. And 85% of our assets have the potential to be widened, extended or enhanced to meet growing demand. But as I've said before, these opportunities need to be aligned to our business strategy. And we remain disciplined. We need to be clear that we bring more to the table than just a checkbook. We're good at partnering, and we also see ourselves participating in new mobility trends as a technology-driven and customer-focused company. This is a natural fit for us. We've got strong in-house capabilities, and we've developed a lot of technologies and platforms that could further develop into ways we reinforce our core. And we'll continue these conversations with our government partners to understand how we can achieve long-term outcomes together. The strategic focus on stakeholders' growth and efficiencies all flow to how we create value for investors. This year, our distribution growth was 7%, more than fully covered by free cash. And in FY '25, distribution growth is forecast to be a further 5%. This year, we've seen good translation of traffic to cash to distributions, underpinned by the quality of our asset base that we will continue to grow over time. And, in the current uncertain macro environment, this is a position of relative strength and highlights our defensive qualities. At our Investor Day, Henry explained that from next year, we're aligning free cash to our operating performance to provide a more transparent and reliable measure of free cash flow. Our new approach of 95% to 105% of free cash should also provide some flexibility around short-term fluctuations like construction impacts. For a long-term infrastructure business like ours, what we've tried to do is provide more predictability to cut through any short-term noise. Long-term macro trends are continuing to drive traffic across our markets. This year, traffic has increased across all markets with an average of 2.5 million trips made on our roads every day. We do see some impact of construction projects in Sydney and Melbourne, as we've spoken about before. In both markets, we estimate that this disruption has reduced growth this year by around 1%. So, without construction impact, growth would have been closer to 2.5% in each of those markets. But the flip side is that we'll see the benefits of these projects as they come online in the medium and longer term. And that includes our own projects like the West Gate Tunnel project as well as government projects that will have flow-on benefits to our network. Despite what we're seeing play out in the broader economy, our Australian traffic is holding up relatively well, with impacts very much at the margins. So, the bigger focus for us is the construction in our markets and how it will benefit our traffic down the line. We also saw North American traffic return strongly this year. This was driven by strong economic activity in the Greater Washington region and the opening of our Fredericksburg Extension project. Macroeconomic conditions will always fluctuate, but defensiveness is core to our investment proposition. We have a high-quality asset base with increasing traffic volumes from long-term population and economic growth. In addition, time and time again, we see there is less elasticity of demand with our customer base continuing to choose our roads. Fuel prices are a great example. We haven't seen a correlation between our traffic volumes and prices at the base. But in the near term, while we can't control the macro environment, we're focused on what we have the most influence over. And that's the customer experience, our cost base and capital discipline. A big part of our capital discipline is how we approach our pipeline. The things we haven't bid on are just as important as the opportunities we've gone after. Our approach here hasn't changed. We're not about growth for growth's sake and we'll continue to apply this discipline to all opportunities we consider. As I said earlier, we believe that more value for our customers will translate to more growth opportunities and value for investors. When we ask our customers what's important to them, it's clear that travel time savings are top of mind. The time savings on many of our roads are material to customers. The safety benefits are too. And by spending less time at traffic lights or in congestion, customers are also benefiting from less wear and tear on their vehicles and also saving fuel costs. In Australia, more than 1 million liters of fuel is saved every workday by taking our roads, equating to a saving of over $2 million a day. We're also focused on providing even more value through our Linked Rewards program, which has grown fivefold since last year to over 1 million members. This year, we've added new rewards partners to help our customers save on their expenses. And we recently provided our more frequent customers with a $0.12 per liter bonus fuel discount to help drive their dollar further. It's this customer focus that underpins our license to grow and gives us a real point of difference when we consider new opportunities. A big focus for us this year was participating in the independent toll review process in New South Wales. The final report was released last month, and we're building on the review, working with the New South Wales government on a clear path forward. We're exploring a range of practical and implementable solutions to make the road network better for Sydney drivers. The New South Wales government recognizes the importance of honoring existing contracts. They also recognize that along with our partners, we've invested $36 billion into Sydney's motorways, which has provided enormous livability and productivity benefits. We're confident there's a way to deliver meaningful reform that helps customers in practical ways. And this can be done while also protecting the value of the investment we've made in the city's roads over nearly 2 decades. In my discussions with government, it's clear we all want to make it easier to get around our growing cities. And that's why we're focused on listening to their priorities and finding solutions that work for them. It's great to see how far construction has come on our projects this year. I was on site at the West Gate Tunnel project a week or so ago and for the first time, drove rather than climbed up onto the elevated road near CityLink. It's only been a couple of months since some of you saw this at Investor Day and so much has progressed in that short space of time. It's really fantastic to see all the elements come together, and we're looking forward to 2025 as we prepare to open the project to traffic. In Sydney, there's also been a lot of progress on the M7/M12 integration project since construction started nearly a year ago. And work has now begun on building the foundation of the main bridges, which will connect the M7 to the M12. In North America, our Fredericksburg extension project has created the longest reversible road in the United States. And thanks to the extension, travelers who choose the express lanes for a round trip between Fredericksburg and Washington are already saving an average of 1 hour of their daily commute. We'll grow our Express Lanes network even further in 2025 when our Northern Extension project is set to open. And we're continuing to explore the opportunity to add 10 miles of bidirectional travel on our 95 Express Lanes. These projects are providing long-term solutions for communities in all our markets and reinforcing the value that we bring to our cities. We've talked a lot about growth, and our new Logan West upgrade is a great example of us realizing opportunities. It's a project that we've been working on for a while now. But through listening to the evolving needs of our government partners, we were able to iterate and move it to binding stage last month. When we talk about populations increasing, there's no better example than Brisbane. Our Logan and Gateway Motorways are key freight routes for the region as they provide access to the Brisbane Airport and Port of Brisbane. But congestion has been getting worse, and we know this can impact productivity. Whilst both motorways need expanding, we've worked with government to phase and upgrade to the Logan as a first step. The project has progressed to the binding upgrade proposal stage, which will determine the final project scope for government to approve. Now, before I hand to Henry, this next slide is not new, but it outlines further the significant pipeline of our opportunities. Today, we have over $12 billion of projects well underway, while we're actively evaluating others. And as I touched on earlier, this includes everything from asset enhancements to potential new projects and acquisitions. The breadth of this pipeline is what gives us the confidence that if we approach it in the right way, we'll be able to pursue growth in areas where we can improve the customer experience as well as returns to our security holders. I'll now hand over to Henry to take us through the financial results.

Thanks, Michelle, and good morning, everyone. Our statutory results are set out on Slide 18, but I'll move through to our proportional results on Slide 19. So, as Michelle has outlined, we continue to have a focus on driving efficiencies into our business, and that's really with a view to optimizing core operations on the one hand and then also setting the foundations for sustainable growth on the other, as Michelle mentioned. The results we're presenting today reflect the hard work that we put in right across the business. So, you can see here on Slide 19, proportional toll revenue increased 6.7% this financial year, and we've been disciplined on costs with growth well below inflation at 3.6%. That supported the EBITDA growth of 7.5% and a 70 basis point improvement in EBITDA margin of 73.1%. Our full year distribution of $0.62 was underpinned by 15% growth in free cash, and the distribution includes approximately $0.03 of WestConnex cash reserves, which we previously flagged. This year, our distribution was 102% covered by free cash. And in FY '25, we expect underlying free cash coverage within that range of 95% to 105%. And that will be subject to things like traffic performance and macroeconomic factors. Positively, on the funding front, our weighted average cost of Australian dollar debt only increased by 40 basis points to 4.5%. And that's a trend that we see holding as we look out over the year ahead, and it really reflects the work we've done to hedge out the book in recent years and also stagger the maturity profile, so that no more than 10% of the books coming up for refinancing in any given year. I'll talk more about our liquidity position in a minute, but you can see here that at a headline level, we have more than $4 billion in corporate liquidity. Some of that's cash that will be paid out in August in the distribution, and we'll also repay some corporate debt next month. But after taking into account those factors, we have just under $2 billion available to support growth opportunities. Looking at the free cash position in more detail, we had a 15% increase to $1.95 billion. We announced at our Investor Day that from FY '25, we'll move to a new free cash definition, which we think is more transparent and better aligned to the operational performance of the business. We also think it's important to call out that this won't provide a benefit to management's incentives. So, for FY '24, we're reporting on the old definition, the headline result of 15% free cash growth for the period was primarily supported by higher EBITDA, which delivered a free cash benefit of more than $180 million, as you can see here. Our borrowing costs continue to be well managed with the muted increase in the weighted average debt costs. The higher interest costs were also partially offset by interest income on cash balances as well. And as we flagged previously, the opening of the M4-M8 Link enabled us to release cash reserves from WestConnex, which had previously been held for construction. So, these reserves contributed roughly $0.03 per security of the full year distribution. Some of the movement in free cash this year was due to timing impacts of distributions from the non-100% owned assets and also the holdback of additional cash in North America to front construction on Project NEXT. So, with the change in free cash definition from FY '25, these kinds of timing impacts will no longer impact our free cash going forward. And this really highlights why we believe it's better aligned to the operational performance of the business. We've set out a year-on-year bridge of the proportional EBITDA on the next slide. So, this shows the EBITDA uplift was driven by the revenue increase of almost $200 million. This was supported, obviously, by traffic growth across our 5 markets and then also embedded contractual escalations in Australia and higher pricing on our North American roads, which was driven in part by increased congestion and then also the introduction of medium vehicle tolling. Our continued focus on business efficiencies throughout the period, delivered that good result on costs and supported an EBITDA margin expansion of 70 basis points to 73.1%, as I said earlier. This financial year also saw contributions from new assets, including Rosel Interchange and the Fredericksburg extension and the contribution of these new assets, largely netted off against the divestments of the interest in the A25 in Canada. Turning to costs. The outcome here reflects our continuing efforts to drive efficiencies across our business. We contained our cost increase to well below inflation at 3.6% for the year, which was slightly ahead of the previous guidance that we gave of 4% cost growth. Direct costs and maintenance, which make up the bulk of our operational cost base were well contained only seeing a minimal increase during the year, and this reflected key initiatives such as improvements to our asset management processes, supplier relationship management and also optimization in technology. And some of this cost increase related to new assets opening during the year, which have a related revenue benefit as well. Our cost result demonstrates the operating leverage in the business with the cost growth below revenue growth, and this is something that we expect to continue in FY '25. So, on an underlying basis, we expect FY '25 cost growth to be broadly similar to this year. The headline cost growth will be slightly higher due to the hand-back maintenance provision associated with the M5. But in reality, this is a concession that's moving straight into WestConnex, and we've already provided for the maintenance in the current period. Our shift in reporting to cash-based maintenance in our proportional EBITDA from FY '25 means that this will effectively be double counted. So, I'd reiterate that once you take that into account, we expect underlying cost growth to be around that 4% that we saw this year. Turning to Slide 23 to look at funding and liquidity in more detail. As I mentioned earlier, we have a strong headline liquidity position with $4.2 billion of corporate liquidity, comprising $1.5 billion of cash and $2.7 billion of undrawn facilities. After allowing for upcoming debt maturities, the committed project spend and then also the August distribution, we have $1.9 billion of available liquidity, which positions us well to support further growth. In addition to this, there are opportunities for further capital releases beyond FY '25. We completed our FY '24 refinancing program and ended the year with a weighted average cost of Australian dollar debt at 4.5%, which was only a 40-basis point increase over the year. And as we look forward, we're well positioned, and our treasury team has already prefunded the majority of the FY '25 refinancing requirements. We continue to see good demand in the capital markets with signs of moderating inflation playing into the interest rate outlook as well. And we ended the year with a debt book approximately 88% hedged for interest rates. And this week, we're pleased to put in place some additional swaps in our WestConnex debt, which brings our hedging to just over 90%. If we look more broadly at the capital allocation framework on the next slide, which we outlined at our Investor Day earlier this year, you can see how we're balancing the growth in our portfolio whilst maintaining a focus on increasing distributions for our security holders. The outcomes in FY '24 demonstrate this clearly with distribution growth of 7% supported by our strong free cash outcome. And at the same time, our balance sheet remaining well-funded to support existing and new projects. As I mentioned on the previous slide, we're comfortable with our available liquidity to support further growth, and Michelle has spoken about the disc approach that we're taking and evaluating a number of opportunities at present. The capacity gives us the ability to look at both M&A opportunities as well as development opportunities within our existing portfolio such as the recent announcement of the Logan West upgrade project with the Queensland government last month. While we're still working through the details of project cost and scope with the government, we'd expect to fund our contribution to this project through internal sources given that strong liquidity position. So, in summary, the business has performed well over the past 12 months with top line growth, cost control and margin expansion, and we remain focused on driving efficiencies into our business with a view to optimizing core operations and also setting the foundations for sustainable growth. Importantly, our funding position remains strong as we continue to deliver on existing projects and evaluate the new growth opportunities in front of us. I'll now hand back to Michelle for some concluding comments.

Thank you, Henry. So, it's been a busy 12 months, but I'm really pleased with where we are and excited about what's to come for Transurban. There's strong momentum in the business and positive signs that we're on the right path. We're focusing our strategy on increasing stakeholder value, unlocking growth and driving efficiencies that will bring sustainable value to our investors over the medium to long term. And in the current macro environment, our defensive characteristics are front and center. It's these characteristics that underpin our cash flow and therefore, our distribution guidance of $0.65 per security for FY '25, representing 5% growth on this year. Let me now open to questions.

[Operator Instructions] Your first question comes from Ian Myles with Macquarie.

Maybe just give us a little bit more color on the traffic and what's occurring in the traffic amount because the quarterly numbers don't look particularly exciting at this point in time. And we've got decent population. We've got decent REGO growth. We have seen still in jobs. What do you think is affecting the growth in traffic?

So, maybe I'll just give like a high-level answer, Ian, and then I'll hand to Henry to go through some of the detail. The big thing that's happening is the construction, particularly in Melbourne and Sydney. And, as I mentioned in my notes, that's about sort of 1% in each of those markets. So, the growth would have been closer to, call it, 2.5%. Sydney, as you know, is a bit more complicated because with the M4-M8 Link and Rosel opening, there's been some change in travel patterns and so for example, trucks that used to use the M5 are now going through the M4-M8 Link. We're clearly watching office occupancy. It's sort of there in Brisbane. It's about 3/4 of the way there in Sydney. Clearly, there were some announcements this week. We're not quite sure yet how they'll play out into the future. But Melbourne is still probably 2/3 the way. There's a little bit happening in terms of airport traffic, still a bit lower. And then maybe there's at the margin commercial traffic a little slower, particularly with residential housing construction having slown a bit. So, I might get Henry kind of to expand on those points, but they're probably the main themes.

Yes. No, that's absolutely right. So, there's certainly near-term noise in our numbers, Ian. And I think the sort of headline call out is that construction impact that we are seeing. We'll expect that to abate in Melbourne over the course of the next year as West Gate Tunnel completes. It's probably got another couple of years to run in Sydney with the profile of the construction projects there. There is a bit of a watch point on commercial traffic, as Michelle said, because it has been weaker in some spots, and we're looking at data like those housing and construction numbers. They have been offset. So, there's a few swings and roundabouts here, but there is a little bit of a watch point at the moment which is probably tied a bit to broader economic activity as well. The Sydney numbers are a bit more complicated because of this redistribution that's going on, and it's happened on a number of assets. So, that's sort of tied in and overlaid on some of those construction impacts there as well. But at the end of the day, you're seeing some of the older assets now normalize at a level where some of the trips have moved across onto WestConnex. So, I think Lancounnel in that Northwest corridor and then also the truck movements on the M5, certainly a notable movement, which have moved to that M4-M8. And then I think the other headline is then Melbourne. It has recovered a bit slower than we'd hoped. And really, the key calls out there is CBD-related traffic is still accounting for about 3% of the sort of presort of cover lag that we're still seeing, and then it ties through to exactly what you see in office currency.

But if I sort of step back on it, Ian, you sort of take a step up. The main impact really is construction going on, which as those projects open across Melbourne and Sydney, clearly, that will start to benefit traffic. West Gate, we should see start to abate as we move into next year. And then the Sydney projects over time ahead. So, that's probably the biggest thing. So, I think there or there about all the things Henry spoke about sort of really at the margin, but there or thereabouts in terms of the main trends.

They coated the proper transport toll to $0.50.

Yes.

No, I know it's not always a good elasticity. But general thoughts on what it might cause or might have?

Look, so at the moment, it's a 6-month announcement. It's hard to say. I don't know what governments will do, but it's a short-term type of announcement. It will have some impact, but it's not material into next year, which is why we kept the guidance at $0.65.

Your next question comes from Andre Fromyhr with UBS.

Just on the guidance of $0.65. Are you able to help us understand how that relates to the payout range of free cash flow? Like is it balanced to interpret it as a 65 is sort of the midpoint of what you think that the 95 to $15 range would imply? Or how should we think about that?

Yes. Thanks, Andre. I'll take that one. Look, we aren't going to guide specifically within the range. It will clearly be within the $95 million to $105 million. And then exactly where we land will be dependent on some of the factors that we're working on exactly where the traffic numbers land for the year, where we get to on the cost outcome. So, obviously, we'll be pushing hard to get it as covered as much as we can. But, in terms of going to specific guidance, we're just not at a point where we'll be specific other than saying 95 to 105 at this point.

And this year, we're 102% covered. So, it might vary a little year-on-year, but over time, sort of around 100% sort of where I'd think about it.

So, am I right in interpreting it then that where there is variability over the year or between now and the end of '25, that variability would show up in that percentage of coverage as opposed to a change in the distribution of 65%?

That was sort of what was behind the change in policy, essentially, yes.

Yes. Maybe just another one on capital releases, is for you, Henry. I can see outlook comment around $900 million for FY '25. Am I right in understanding that's a bit lower than your previous guidance, if you consider how much you've used in capital releases in the second half? And is that just a shift to reflects the preference for some corporate funding as opposed to asset level funding.

Thanks, Andre. No, look, that's not lower. That's just consistent with that number that we've been slowly sort of working through in recent periods. So, I think last period, it might have been 6 billion from memory, I might have that number slightly up, but the $900 million there is consistent with the balance of capital releases we had available to the end of FY '25. We haven't guided out beyond that at this point, and it's not our intention to do so. You may have heard previously, I've spoken more broadly about the rule of thumb around the sort of expansion on the balance sheet and growing that capacity over time. So, as a rule of thumb, you might think about for every $100 million of additional EBITDA, there's circa $1 billion of potential debt capacity that emerges in terms of group balance sheet. The profile of the releases themselves are a little bit more lumpy. So, in some years, we don't have much. And in others, we have more. And when we actually look at the specifics, but the reality is that the treasury team look at each opportunity at a point in time and evaluate whether it makes sense in the quantum.

And maybe just one more, if I can. Can you just talk a bit about how much of a focus in North America is as a growth market feel at the moment? I know you've been asked questions previously around specific opportunities as they've come up. But if you look at the new org structure, you have as much Exco representation for the Australian network as you do for the North American network. Is that a bit of a signal of how important North America is relative to the rest of the portfolio?

Maybe what I'd add to that, Andre is to say, look, we do see interesting opportunities potentially coming up in North America, but we're certainly not going to do everything there. It does start in Virginia. And though it's really great to have bow on board and the experience he brings across the market. But starts in Virginia, and we think there's some really -- you don't have to look that hard to see opportunities in Virginia that could significantly increase the size of our footprint there. So, that's where it starts. But others will do as they make sense, and that's in terms of the demographics of the market and also just whether the transaction itself is one that makes sense and in particular, whether it's one we think we can create real value for our investors. And so, we think about what is it that we can bring that is unique and that will be opportunity by opportunity specific, it may be through partners, it may be through other types of innovation. And that's why you saw us sort of step out of some transactions in the U.S. that have happened because we just couldn't see the value in them either strategically or financially for us. But we think there's opportunity. I wouldn't read too much into the org structure. It makes sense to sort of have a national view on the way we approach things. And as you'd see in Australia, we've got a whole range of roles that sit across the Australian market through a national lens.

Your next question comes from Rob Koh with Morgan Stanley.

Congratulations in particular on the cost result there. Just first question, I guess, is around your growth opportunity in Queensland. I guess the state government there is talking about taking the concessions back in the 2050. And they've also, I think, said they've got limited appetite for toll increases. So, I'm just wondering how we should be thinking about the revenue mechanism for the Logan upgrade projects, please?

Yes. Thanks, Rob. So, the first of your points is a discussion about after the concessions ended. So, of course, it sort of gets handed back at that point in any event, unless something changes. In terms of the mechanism for the Logan widening, it's too early to say. There are a range of different options we've been speaking to the government about, and it really depend on priorities at the time. What I think has been good in our discussions with them is we sort of came up with a range of possible scenarios that could help fund that project. And I think that's what actually helped the project get announced was there a number of options there. It's a bit early to say which one will land because it will depend on what the priorities are when we get to the next phase.

Just my next question just relates to the analyst notes, which is, I guess, Slide 28. Thank you very much for providing those. Just looking at the WestConnex commentary, the previous commentary was that Brazil was expected to be broadly neutral. And the commentary around that now kind of uses the word redistribute. Is that just me overthinking things as usual? Or is there actually a change in your feelings on that particular path of the network?

It's probably the former, to be honest, Rob, I don't think we had intended to shift anyone's perception around that. So, I wouldn't read too much into that.

Maybe just a final question. I noticed your interest rate hedging 88-ish percent, and I think you said you're going to put some extra swaps on the take up to 90%, which is a very high level of hedging. But it is down a bit on historical kind of 95% level of hedging. Just wondering if you've had any change or tweak to policy.

No. We haven't changed our policy at all. And our intention is to have the book is fully hedged as we can at a point in time. We just left a little bit of the more recent DCM debt that we took out on the hedge, just given where rates were at the time, but we can see markets are already trending back into a range where it's probably going to start making sense to look at hedging that. And I think you'll see us continue to take those opportunities as they emerge.

I'd add to that, Rob, that when we look at our approach on hedging, it's cost of debt and availability of debt equally very important to us. And so, as markets move quite significantly, we didn't think the right thing to do was go short in terms of debt, so to keep it longer dated, but just wait a little while to hedge, and that's what the treasury team has done.

Your next question comes from Anthony Longo with JPMorgan.

Just a quick one for me with respect to costs. Again, that was a strong result from that perspective, and I appreciate the guidance that you have given for to next year on that sort of 4-ish percent growth going forward. Are you able to talk through, I guess, any additional efficiencies that you can make to the operating model and maybe even thinking on the corporate cost line, which is also reasonably high as well? Are there opportunities to potentially thinking about I guess the structure of the business more broadly, which might also see that come down as well?

Yes. Maybe I'll give a high level, and then Henry can add to the detail. I mean we've been really focused on trying to make sure that more of the traffic outcomes flow through to shareholders. And so, that's why cost has been something we've been really focused on. A big part of the operating model is to say, with having that sort of whole of company view, we think there'll be efficiencies in many places, and we're already saying to see the benefit of some of that by just having an enterprise view looking at various cost lines, and that's whether it's corporate costs or in the assets. I mean Henry sort of leading the charge on this with you and others so he could add a little bit more detail.

Yes, sure. And that's exactly right. Really, there's a whole range of areas that we're looking in. So, we're going to continue to sort of maintain that focus through the year ahead. We've obviously flagged asset management costs. We talked about technology rationalization, which is around some basic things like fewer corporate systems, but over time, we'll continue to interrogate that because that's a reasonable spend within our business. And then you've got this sort of variable development spend, which we're looking at quite closely and it ties into the broader comments around discipline in terms of how we're going about things. The corporate segment, I think you're looking at in the sort of detailed breakdown the back sort of doesn't quite line up in terms of how we're thinking about it. So, that's sort of as much, there's a bit of just unallocated spend across the markets and the JVs there, which is caught in that. But I'd sort of encourage you more to be looking at it in terms of Slide 22, we've given a sort of category breakdown there in terms of how we're thinking about it around direct costs, maintenance, the development and then the volume-related toll expenses, which is very much sort of how we're thinking about it in framing up some of these programs.

Perhaps the next question for me. Just looking at the New South also review and then I guess the final report that has come out on that front. I appreciate you're looking to have a neutral outcome and a contract is a contract and the like. But focusing more on the principles of tolling and how concessions may be set going forward? I mean, you've had some very attractive concessions in a number of geographies to date. So, I mean, how are you thinking about maybe what that might look like going forward in terms of the attractiveness? And even the building blocks as to how those concessions may be sit in future as they're sort of rolling forward?

Yes. I mean I think the good thing on where the New South Wales toll review is up to is you've still got all parties sitting at the table willing to find an outcome that is good for Sydney in today's priorities but also recognizes the value of the significance of $36 billion worth of investment that's being made. As it goes to future opportunities, I mean everyone is different, actually. And it depends on priorities at the time. We were just talking about that in relation to the Logan widening that there are a range of different levers that can be managed, depending on what the priorities are at the time. So, as I look at in the future, it's really going to depend on what the need is, and we think the need is there, given the population growth. What the government's other priorities are in terms of their own capital and then what they think makes most sense in terms of the value to the community and how that gets paid for. So, I just think it's a little bit premature to say what future concessions might look like. But I think if you sort of go back in history, they're all quite different in any event. And so we just work through what makes sense at a particular time.

Your next question comes from Suraj Nebhani with Citi.

Just firstly, on traffic, maybe this has already been answered, but just keen to understand, you had called out construction and diversion impact. Do you expect any incremental negative traffic impact from those going into FY '25?

So, I'll let Henry answer in detail, but there's quite a bit of difference between Melbourne and Sydney with West Gate Tunnel sort of getting towards the end of the project. And in Sydney, probably taking a little longer for some of those projects to come to fruition.

Yes, that's exactly. It's Melbourne will abate. As I said earlier, just tied to the profile of the West Gate Tunnel project completion, Sydney's sort of major projects agenda still has a couple of years to run. So, we probably will see a slightly greater impact from construction as we look out through FY '25. There will be offsetting factors to that. Obviously, the redistribution has largely played through. There'll be a little bit of annualization from some of the more recent assets that opened, but we're starting to see that settle as well. But in terms specifically of construction as the watch point, Sydney has probably got a little bit more to go Melbourne is going to West.

Because remember, M7-M12 that construction only started partway through the last year as well. So, you sort of get the full year impact of that too.

And the second one was on the acquisition opportunities. I know maybe you figured out a few questions already on this, Michelle. But, I know you have called out some markets in the U.S. target markets. Can you talk to any progress there? And it seems like it's a very competitive acquisition market. So, how do you guys expect to continue to transact there in with high competition?

So, probably similar to the answer I gave to the earlier question is, there's a lot of live stuff going on in Virginia right now that we're working on. And clearly, that's a whole different scenario compared to a new market, and we think there's real value we can add either to our own assets like the bidirectional project we're working through with VDOT right now or potential extensions of some of the other assets in Virginia. So, it starts there. In terms of other markets, it really depends. We are not going to shoot at everything. We're really clear on that. It needs to make sense in terms of the market characteristics, but also what we think we can bring. And so, that will just evolve as it evolves. And it may be because we find a way to partner with people, it may be because we find a way to bring innovation into a particular market. So, you won't see us in everything, but you will see us looking at things that make sense.

And finally, just on Australian opportunities. Obviously, a stake in EastLink has transacted over the last half. Is it your understanding that if there was another stake to come up, you will be able to participate in that? Or is that not really an option?

So, I mean, that's a discussion to be had into the future. We just spoke, I think, at the half as to why the particular transaction that was coming up on EastLink, it's sort of the size of it, other opportunities in Victoria and the relationship with the government sort of wasn't right to pursue that at that point in time. If a future opportunity comes up, we'll consider it on its merits at that time, and we'll work through the various regulatory and other considerations.

And just on the Australian opportunities, like do you see any big potential opportunities apart from, let's say, extensions and brownfield stuff? Like is there any greenfield growth or something like that you guys looking at? Or do you expect to come up over the near term?

Again, it sort of comes back to what is needed at a particular point in time, step right back up, population growth says people are going to need to move around, where and in which city will depend. I mean, Queensland is a really good example of a recent opportunity that sort of went from discussion through to announcement. And that's the sort of thing where we see we add real value. We understand what the government wants, that we know the congestions there on the network, whether they are in the form of other sort of asset enhancements or greenfield opportunities that join into our assets, it will depend. But we see, if I bring it back to first principles of population growth, we see the need is there and the way we're approaching our relationships with our stakeholders, starting with our customers, communities, government partners is to try and show we add the most value. And if we do that, I'm confident the opportunities will be there.

Your next question comes from Justin Barratt with CLSA.

My first question was just in relation to capital releases. I guess over the last few years, you've really focused on top leases up and including sorry, FY '25. But just wanted to start thinking about how we should think about capital releases and the potential for those beyond FY '25. Are there material a couple of releases that we should expect in FY '26 and beyond as we currently stand?

Yes. Look, I'll take that. Justin, it is lumpy. So, yes, there are things that we have in our forward funding plan that we would target. Some years have relatively small amounts. If I look out over the sort of full year funding plan, some years have small amounts. Some years do have some reasonable capital releases projected. I think in the current environment, we have shown a propensity to interrogate all of those and work out what makes sense in terms of quantum and timing around those. But again, I think there's 2 things going on, more broadly rather than move to discrete guidance on future capital releases, which we've done previously. We've moved now to say, look, there is a rule of thumb about how to think about the growing balance sheet capacity and then how we actually attack that will be dependent upon market conditions and needs at a given point in time.

And I just wanted to ask then about, I guess, your cost growth versus broader inflation. Obviously, FY '24, you've done very well cost growth lower than inflation. But I think, Henry, your cost growth into FY '25 looks like it's broadly in line with inflation expectations across Australia as we currently stand. So, I just want to see if you make any comment around your expectation or hope for cost growth in your business going forward versus inflation.

Yes. Thanks, Justin. Look, it's a continuing focus, as you've heard from both Michelle and I today. So, we clearly have a number of initiatives in flight within the business. And then there are much broader themes at play Michelle spoken about a reorganization around a new operating model, which is obviously aimed at driving efficiencies, which have cost sort of outcomes, partially in focus there as well. I think as we look forward, clearly, the sort of first ambition is to make sure that we're continuing to drive that margin expansion in the business. We've mentioned that a few times today, and you can clearly see that's something we're looking at carefully. And then, in terms of where we end up vis-a-vis inflation, I think I'd rather just stay with the guidance based on our current numbers, saying if you strip out that sort of small piece of the M5, which we've already provided for, which will flow through next year, 4% looks to be where it will land at the moment. Now obviously, our ambition will be to try and beat that based on everything we're doing within the business, but that's where the numbers currently sort of send us.

Your next question comes from Anthony Moulder with Jefferies Australia.

If I can start with the Logan Gateway, what sorry, the loan upgrade, local waste upgrade, why have we heard about the Gateway project? Does it need to be sequenced after Logan west? Is that still something that you're working through with the Brisbane stack company?

Yes. Great question, Anthony. So, both roads, the congestion is there, and enhancement is something that should happen over the coming period. As we sort of worked it through with government and their priorities, it made sense to start with Logan first and then to continue some discussions in relation to Gateway. I don't know timing of that, but I know the need is there. And so, what we've tried to do is sort of meet the government where they are in terms of priorities, which is why we've gone with the Logan first.

So, it still work in progress on that way?

Yes.

And then I wanted to go back to the New South Wales toll review some expectation that the government will have something to the market by the end of this calendar given the complexities that you've talked to before as first gear all the different stakeholders. Is that your expectation that something can be in some sort of solution can be tapered by the end of this calendar?

Well, that's certainly what we're working towards. So, yes, I mean, there's clearly work to do to get there. But if you have a look in the independent reviews, there was reference to a letter to the government from us and our investment partners, which committed us to working with the government, and we're willing to work quickly on that. One of the reasons why what we proposed was a more so corridor-based solution is because that's simpler and able to be done faster, we think, because it doesn't need to be done necessarily across all whole all concessions at the same time. It might be able to focus on certain concessions. So, we're very, very focused on it and we're sort of happy to move as fast as the government wants to move.

And lastly, on the growth opportunities you still keep linking that has there been any update on the movements of an acquisition or stake in it?

No, no, nothing new other than the answer I gave to the question earlier, but no, nothing new.

Your next question comes from Cameron McDonald with E&P.

A quick question similar sort of focus, I suppose, one around the cost and one around the growth opportunities and cash flow. So, if you're looking at growth opportunities, what do you think the timing of that is going to be, particularly with the M&A and offshore? And how are you balancing up the expectations between concession length extension offer to the portfolio versus accretion to the distribution?

Yes. I mean that's exactly the question. So, the way we're looking at it, clearly, we know distribution growth is really important to our investors. And at the same time, we want to continue to replenish the portfolio, but we want to do it in a way where we think we bring something good and unique to the opportunity so that we create value for investors as well. The thing in a business like ours, it's a long-term business, you can never pick the timing. And if you try and rush the timing, that's when you do the wrong deal. And that's why we have quite a long pipeline of opportunities where we're always working on in parallel, and you never know which one might come at any particular time. So, I can't be definitive on time frames other than to say we're always trying to manage both and not do anything sort of with gun to our head from a timing perspective. And I think our average concession life in that sort of 25, 30-year range gives you the ability to do that in a really disciplined and thoughtful way.

And just as an extension to that, I mean, without wanting to preempt the New South Wales toll review. I mean part of this clearly seems to be trying to alleviate cost of living pressures, which on the face it leads to a toll reduction potentially for a concession extension or alignment with, say, WestConnex. But again, that's got to be negative to the short-term distribution.

So, I mean, I can't answer what the outcome will be because we've got to work through that. But what I can say is we're mindful of that as we work through it. And certainly, our communications has been focused on protecting the value of the investment that's being made in a way that delivers better outcomes for Sydney, but very mindful of the distribution and the requirements of our investors. So, we're just working through all of that. And we have it front and center in our market. Yes.

And just looking at Virginia, you mentioned Virginia a few times, Michelle. What's the contractual arrangement with the partners in your existing portfolio over there with UniSuper sprint CPPIB?

Yes. So, certainly, if we do something in the Greater Washington area, our partners would sort of have first option, if you like, of participating in that through Transurban Chesapeake. If a partner chooses not to and we had that on WestConnex, actually, one of our partners chose not to, and we brought in another partner, and we just work through that at the time. But certainly, the expectation would be in the Greater Washington area, we'll do things together. And then beyond that, if we went into a new market, it would be natural for us to talk to our partners, they may or may not choose to be involved, and it will just depend on their own priorities.

Your next question comes from Owen Birrell with RBC.

I guess a continuation of Cam's question with regards to defending that $36 billion investment in New South Wales. With the New South Wales all review, as you said, government is pretty keen and you guys are pretty keen to get something happening sooner rather than later. Can I just ask with the discussions that you've had with your partners of your existing assets in New South Wales, how comfortable are those partners in taking a lower toll in return for a longer concession?

There's nothing of substance to talk about right now. So, we're sort of talking hypotheticals, which I don't think is helpful. I sort of come back to the answer I gave to one of the earlier questions, which was the letter that was signed by all the partners shows that everyone is in good faith sitting at the table with the government. And so, I think there's a genuine willingness to explore options. The fact that we've put forward a corridor-based option means there is flexibility in how a solution may play out but it's just premature to say what that solution might be, but we'll iterate that with the government depending on where their biggest priorities are over the coming months.

And can I ask just, I guess, how has the ultimate say in all of this? I mean, if the government comes in and says, where you going to legislate to reduce the contracts you have? I mean, at what point does that trigger you to say, okay, we're going to take you to for it?

I just think we're so far from that discussion. It's just not helpful really. I mean what we have is a genuine willingness to work through things, both for the government and for us, the government has been on the record, recognizing the binding nature of contracts. The independent review also recognize the binding nature of contracts. And I think all of us feel that the best way to get to that outcome is to sit down and work through it.

Yes, I know you said that you haven't sort of gone into these discussions yet, but if they're looking to table something by the end of this year, you've effectively only got, what is it, 5 months?

There's a lot of work going on, absolutely, and we're going to have to work really fast, and we've committed to doing that and putting whatever resources we need into achieving that.

Your next question comes from Nathan Lead with Morgans Financial.

Can you just talk me through how much of your interest was capitalized during the period as opposed to expense, particularly on a proportionately consolidated basis, obviously, it has an impact on the free cash flow outlook. And just a comment on whether it's fair to assume that, that will continue to grow over time as the development projects continue to be funded with debt?

Yes, Nathan, I'll take that. So, obviously, the main part of the interest capitalization has been coming through on the West Gate Tunnel, which we've been talking about for a while. So, the sort of amount of capitalized interest we had through this period was $139 million. And we'd expect obviously that number, in terms of capitalization, to fall when that shifts to being interest expense. So, the actual expense this period was $153 million. But then the profile of capitalization around interest falls away significantly once the Westgate Tunnel completes.

But that amount that was being capitalized and actually gets expensed, right? So, it's the free cash flow?

Yes, that's right. So, we've spoken previously around that being something that doesn't quite neutralize the sort of free cash impact of the opening of Westgate. We still have a marginal positive that will come through to free cash, but it does mitigate it to some extent through those early years as that interest expense starts to hit.

Because some of the benefits already coming through.

Yes, that's a good point. So, obviously, the funding mechanisms, a lot of them we've already sort of taken through the sealing concession.

Is that number that you quoted there, is that proportionately consolidated across all the assets? Because obviously, you've got M7, you've got some of the works in the express lanes, et cetera. So, if we capture all of that, what's the number for the year?

It's $139 million. This is the capitalized number. That's the number across all.

There are no further questions at this time, and that does conclude our conference for today. Thank you for participating. You may now disconnect.